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Speculation

Speculation is a risky bet that could have a large payoff if it works out. The speculative investor attempts to profit from the price fluctuations of real estate, commodities, stocks, or any other type of investment that stands to churn out a profit.

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Will your house be worth more in five years than is now? Will the prices of milk and eggs finally come back down to Earth? And what about those pork bellies, anyway?

No one knows for sure where prices will go, but speculators will do their very best to profit from guessing (speculating). Whether it’s real estate, commodities, stocks, options, currencies, or any other investment that stands to crank out a profit, these folks will take long and short positions based on whether they think prices will move up or down.

The difference between this type of investing and, say, value investing is that speculation focuses on price fluctuations -- not on whether a company sells a popular product, boasts a solid balance sheet, or has a savvy management team. And again, it doesn’t pertain to just stocks. Most new housing developments include "spec" homes, for instance. These houses are being built without a signed purchase agreement in anticipation that buyers will arrive later.

Another common example in the United States is land speculation. There is only so much land, so speculators assume that its value will gradually increase. The investment becomes more palatable when the property generates enough cash to pay property taxes and likely maintenance costs -- timberland is attractive because the trees can be harvested to provide income, as is farmland when it’s suitably productive. AllRight Auto Parks (now long ago acquired) made yet another type of land speculation when it snatched up vacant plots in downtown regions of several cities and turned them into parking lots, all while waiting for a developer to come around and pay its price.

One of the big draws with speculation is that investors typically stand to make large sums of money if things go in their favor -- buy a home in an “up and coming” neighborhood, and you might just earn yourself with a windfall when you sell it a few years later. On the other hand, speculation also brings high risks – just ask the folks who bought oil for $145 per barrel in the summer of 2008, not long before it dropped to below $40.